Financial Briefs

Retirement Income Alert: Do You Own A $1 Million Plus IRA In A High Income-Tax State?

If you own a $1 million IRA account and live in a state with a high income-tax rate, here's a financial planning tip that could save you thousands annually on state income tax. The strategy requires setting up a trust in a state with no income tax, which is probably not something you do every day. So, here's a primer.

This is a new way to legally reduce your taxes and comply with current tax law, and a key principle driving the strategy recently was affirmed by a Supreme Court ruling. Basically, the non-grantor trust you would set up creates a new taxpayer in a state with no income tax. Then, the non-grantor trust distributes income. If you live in a state with an income tax, establishing the trust outside the reach of the state in which you live eliminates the state income tax you'd otherwise owe.

The Court rejected North Carolina's argument, saying it had violated the Fourteenth Amendment's due process clause, since the beneficiaries had no right to demand the income from the trust and are uncertain to receive it. In fact, the trust had paid no income to the beneficiaries in the years for which North Carolina claimed taxes were owed!